Longer wait to collect pensions

The Tory commitment to running a budget surplus does not mean the party must rule out tax cuts, David Cameron says

Millions of people have been warned they will have to wait longer to collect their state pension as George Osborne prepares to deliver his latest assessment of the state of Britain's economy.

Government sources set the tone for tomorrow's Chancellor's Autumn Statement with the disclosure that people now in their 40s will not now get the state pension until they are 68 while those in their 30s will have wait another year until they are 69.

News of the move came after Mr Osborne announced a further £3 billion Whitehall spending squeeze over the next three years.

It came despite strong expectations that the Chancellor will announce a sharp upgrade in the Office for Budget Responsibility's (OBR) official forecast for economic growth.

The improved economic outlook - with City analysts suggesting the OBR could more than double its previous projection of just 0.6% growth at the time of the Budget in March - means that the Government will have to borrow less than previously predicted.

But despite some well-trailed giveaways - including a tax break for married couples and a cap on business rates - ministers have been keen to stress that they are determined to stick to their long-term plan to rebuild the public finances.

The delayed retirement dates will help save around £400 billion from the national bill for pensions over the next 50 years, on top of the more than £100 billion already banked from planned rises to 66 by 2020 and 67 by 2028, which are unchanged.

The Government said that future changes in the pension age will be based on the principle that workers should expect to spend about one-third of their adult lives, on average, in retirement.

Sources said the formula - which will be applied in a pension age review mechanism to be held every five years - should ensure that the country is able to offer "decent but affordable" pensions to people in their old age while maintaining "fairness across the generations".

"As a result of the announcement, people in different generations can expect to spend broadly the same proportion of their lives contributing to, and receiving, the state pension," said a Government source in a statement.

The formula will be applied for the first time in a review shortly after the 2015 general election to fix the dates of the increases to 68 - which is likely to be brought forward from 2046 to the mid 2030s - and 69 which is expected to take place by the late 2040s.

Earlier Mr Osborne disclosed that he and Treasury Chief Secretary Danny Alexander had written to their Cabinet colleagues informing them that central departmental spending is being cut by more than £1 billion a year between now and 2015/16.

The Treasury said that "strong financial management" by departments this year meant there were likely to be significant underspends in their budgets, allowing the Treasury to release £1 billion of its annual £3 billion reserve.

But in order to "lock in" this lower level of spending, the 1.1% reductions will be made across departmental resource budgets over the next two years.

The budgets for health, schools, aid, local government, HMRC and the intelligence and security services will be spared the further cuts while the Ministry of Defence has been given "exceptional flexibility" to keep its expected underspend of £800 million.

The exemptions will mean further pain for unprotected departments such as the Home Office, the Ministry of Justice and the Department for Work and Pensions.

There will be some relief, with Mr Osborne set to use his statement to announce details of the Conservatives' long-promised tax breaks for married couples - a move strongly resisted by their Liberal Democrat coalition partners.

He is expected to say that there will be a transferable tax allowance worth £200 a year to an estimated four million couples from 2015, at a cost of £700 million.

He is also expected to confirm that rises in business rates will be limited to 2% instead of being linked to inflation, after strong lobbying from a number of business organisations.

Meanwhile behind the scenes an extraordinary coalition row broke out between Deputy Prime Minister Nick Clegg and the Conservative Education Secretary Michael Gove over the funding of a £150 million programme to upgrade school kitchens.

The scheme is a key element of the Lib Dems' plan - announced at their party conference in September - to offer free school meals to all five to seven-year-olds.

Furious Lib Dem sources accused Mr Gove's officials of "lying" and "talking bollocks" after they were reported to have briefed reporters that they may have to raid the Department for Education's basic needs budget - used to meet the demand for extra school places - to fund the scheme.